For individuals, if you are drowning in tax debt, two main bankruptcy options may help: Chapter 7 and Chapter 13. The difference comes down to whether you qualify for Chapter 7, and whether Chapter 13 can offer greater relief considering your individual circumstances. Find out which path fits your situation.
If tax debt feels like it’s pulling you under, you may be surprised to learn that bankruptcy can sometimes provide a lifeline. For individuals, two main bankruptcy options come into play: Chapter 7 and Chapter 13. Each one works differently, and the right choice depends on your income, assets, long-term goals, and the dischargeability of the tax claims. Understanding the basics can help you navigate a clear path forward.
Chapter 7 Bankruptcy: A Fresh Start
Chapter 7 is often called “liquidation bankruptcy.” In simple terms, it’s designed to give you a fresh start by wiping out eligible debts, including certain tax debts. Not everyone qualifies, though. To be eligible, you must pass a means test, which compares your income to your state’s median income. If your income is too high, Chapter 7 may not even be an option for you.
In Chapter 7, most unsecured debts—including dischargeable tax claims, —can be eliminated without payment to creditors unless there are non-exempt assets in the case (many people keep most or all their property, thanks to exemptions that protect essentials like a modest home, car, or retirement savings).
Chapter 13 Bankruptcy: A Repayment Plan
If you don’t qualify for Chapter 7, you have assets you want to retain with secured debt arrearages , or there are smaller non-dischargeable tax claims, Chapter 13 might be the better option. Instead of wiping debts out immediately, Chapter 13 creates a three- to five-year repayment plan based on what you can afford. At the end of that plan, many remaining eligible debts—including tax claims—are discharged.
One significant advantage of Chapter 13 is that it can prevent penalties and interest from accumulating on tax debt. It also gives you time to catch up on debts that Chapter 7 can’t easily address, like certain recent taxes, missed mortgage payments, or child support.
Choosing Between Chapter 7 and Chapter 13
So, which is right for you? It often depends on:
- Income level: Lower-income individuals may qualify for Chapter 7. Higher-income individuals may be steered toward Chapter 13.
- Assets: If you own significant property you don’t want to risk losing, Chapter 13 may offer better protection.
- Goals: If you want immediate relief and qualify, Chapter 7 is often the faster and less costly option. Otherwise, if planned properly, a Chapter 13 plan can provide structured repayment, and protection from collections, and still yield substantial benefits.
Getting the Timing Right
It’s not just about choosing Chapter 7 or 13—it’s also about when you file. Tax debts have strict rules about age, filing, and timing before they can be discharged. Filing too early can mean losing out on relief you might otherwise qualify for. Sometimes, it makes sense to hire a tax-bankruptcy attorney to represent you before the collection division of the taxing agency and delay the bankruptcy filing to eliminate more tax debt.
Professional Help Makes the Difference
This is where professional guidance matters. At Tax Workout Group, our team will perform a comprehensive Tax Dischargeability Analysis. We review each tax claim and every event tied to it—such as filing dates, extensions, assessments, installment agreement requests, CDP hearings, tax lien filings, etc., as they all can impact the dischargeability of the tax claims. By understanding these details, we can help you file the right type of bankruptcy at the best possible time, maximizing your chances of eliminating tax claims, penalties, and interest, alongside other dischargeable debts.
Bottom Line
Bankruptcy isn’t a one-size-fits-all solution, but for many people struggling with tax debt, it can be a powerful tool. Whether Chapter 7 offers the fresh start you need, or Chapter 13 gives you structure and protection, knowing your options is the first step toward financial relief. You don’t have to face the maze of tax and bankruptcy law alone—help is available.